Managerial Economics Eco/5011 Week 1 Assignment Of Microeconomics

MZUMBE UNIVERSITY

DAR ES SALAAM BUSINESS SCHOOL
MANAGERIAL ECONOMICS ECO 5011
MBA –CM 2013 – 2014

TABLE OF CONTENTS
1.0 INTRODUCTION........................................................................................3
2.0 EXECUTIVE SUMMARY............................................................................4-5
NAME OF THE COMPANY...............................................................
3.0 THREAT OF NEW COMPETITION................................................................6-8
4.0 TREAT OF SUBSTITUTE PRODUCTS OR SERVICES...........................................9
5.0 BARGAINING POWER OF CUSTOMERS(BUYER)..........................................10-11
6.0 BARGAINING POWER OF A SUPPLIER.............................................12-14
7.0 INTENSITY OF COMPETITIVE RIVALRY............................................15
8.0 CRITICISMS
9.0 REFERENCE.............................................................................................................16

INTRODUCTION
DEFINITION OF TERMS
Competitor analysis in marketing and strategic
management is an assessment of the strengths and weaknesses of current and potential competitors. This analysis provides both an offensive and defensive strategic context to identify opportunities and threats, and it is an essential component of a corporate strategy.
Michael E. Porter of Harvard Business School formulated a framework for competitive analysis basing on the microenvironment in 1979. It draws upon industrial organization economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market(overall industry profitability).
In general, any strategic business manager is trying to steer his or her business in a direction where the business will develop an edge over rival firms. Michael Porter 's model of Five Forces can be used to better understand the industry context in which the firm operates.
Porter’s model of competitive forces assumes that there are five competitive forces that identify the competitive power in a business situation.
Porter 's five forces include:

Three forces from 'horizontal ' competition

* Threat of new entrants or barriers to entry
* Threat of substitute products or substitutes
* Threat of established rivals or competitive rivalry

Two forces from 'vertical ' competition

* The bargaining power of buyers or buyers
* The bargaining power of suppliers or suppliers

Threat of new competition/entries
Profitable markets that yield high returns will attract new firms. This results in many new entrants, which eventually will decrease profitability for all firms in the industry. The existence of high barriers to entry and low exit barriers will ensure that fewnew firms can enter and non-performing firms can exit easily. Threat of new entry is high when:
Capital requirements to start the business are less
Few economies of scale are in place
Customers can easily switch (low switching cost)
Your key technology is not hard to acquire or isn’t protected well
Your product is not differentiated
Threat of substitute products or services

Threat of substitute products means how easily your customers can switch to your competitors product. Threat of substitute is high when:
There are many substitute products available
Customer can easily find the product or service that you’re offering at the same or less price
Quality of the competitors’ product is better
Substitute product is by a company earning high profits so can reduce prices to the lowest level.

Bargaining power of customers (buyers)
Bargaining Power of Buyers means, How much control the buyers have to drivedown your products price, Can they work together in ordering large volumes. Buyers have more bargaining power when:
Few buyers chasing too many goods
Buyer purchases in bulk quantities
Product is not differentiated
Buyer’s cost of switching to a competitors’ product is low
Buyers are price sensitive
Credible Threat of integration
Buyer’s bargaining power may be lowered down by offering differentiated product. If you’re serving a few but huge quantity ordering buyers, then they have the power to dictate you.

Bargaining power of suppliers
Bargaining Power of supplier means how strong is the position of a seller. How much your supplier have control over increasing the Price of supplies. Suppliers are more powerful when
Suppliers are concentrated and well organized a few substitutes available to supplies
Their product is most effective or unique
Switching cost, from one suppliers to another, is high
You are not an important customer to Supplier
When suppliers have more control over supplies and its prices that segment is less attractive. It is best way to make win-win relation with suppliers. It’s good idea to have multi-sources of supply.
Ex.: If you are making biscuits and there is only one person who sells flour, you have no alternative but to buy it from him.
Intensity of competitive rivalry
Industry rivalry means the intensity of competition among the existing competitors in the market. Intensity of rivalry depends on the number of competitors and their capabilities. Industry rivalry is high when:
There are number of small or equal competitors and less when there’s a clear market leader.
Customers have low switching costs
Industry is growing
Exit barriers are high and rivals stay and compete
Fixed cost are high resulting huge production and reduction in prices
These situations make the reasons for advertising wars, price wars, modifications, ultimately costs increase and it is difficult to compete.

A diagrammaticrepresentation of Porter 's Five Forces.

TELECOMMUNICATION INDUSTRY IN TANZANIA
INTRODUCTION
Information, Communication and Technology (ICT) are key factors in socio-economic development. Access to relevant information and knowledge improves efficiency and productivity; enhances social services delivery; increases access to market opportunities; and improves government performance, among others (UNDP, 2001b)1. For these reasons, ICT - mobile phone technology included - has been considered such vital that in most developing countries including Tanzania, it has been incorporated in the poverty alleviation and other socio-economic development strategies.
Like in other developing countries, in Tanzania ICT is regarded as an important tool for accelerating poverty reduction through its role in raising productivity, generating economic growth, creating jobs, facilitating learning, knowledge sharing and global information flows (ESRF: 2007). According to Tanzania Development Vision (TDV) 2025, Tanzania is expected to become a knowledge-based society, with a vision to have a universally accessible broadband infrastructure in ICT as well as expertise that enhance sustainable socio-economic development and accelerated poverty reduction; and to become the ICT development hub regionally (TDV 2025). To date there is remarkable progress towards this goal (ESRF: 2007). Mobile phone technology in Tanzania has been growing at an amazing pace in terms of both the number of service providers as well as that of the users
By 2009, a total of six (6) mobile phone service providers were issued communication licenses by TCRA. These providers are TIGO, Zanzibar Telecoms (ZANTEL Mobile), Vodacom, Benson, TTCL (Mobile) and Celtel - now known as Airtel. In addition to that, two fixed line companies i.e. Tanzania Tele-Communication Limited (TTCL) and Zanzibar Telecoms (ZANTEL) have been operating along with the existing mobile phone service providers.
Following the above development, over 10 percent9 of Tanzanians were owning mobile phones by 2009 (TCRA), 17 percent of Dar es Salaam population, 10 percent in other urban areas, and 4 percent of rural population.
Since 1990s the telephone services in Tanzania was mainly depending on the fixed line, and was very unreliable. The service was provided by the Tanzania Telecommunication Company (TTCL) especially in large cities. However, since 1994 mobile phone technology started to improve. By 2005 a total of six mobile companies had been registered; they focused their coverage initially to highly populated areas especially big towns to maximize profits (TCRA; 2005). Nevertheless, with the increasing activities in mining, commerce, national parks, tourism and small towns in rural areas, the business expanded and service providers gradually directed attention to rural and peri-urban areas as well. The Impact of Mobile Phones in Development
Mobile telephony has been credited to have positive impact on both economic and social welfare.
Economically the impact has been manifested in many different ways, such as generating income (boosting GDP); creating jobs (both in the mobile industry and the wider economy), increasing productivity in different areas and providing public revenues through taxation from mobile operators. Different sources have explained this phenomenon, viz. Mobile phone technology being one of the most important sources of GDP in both developed and developing countries (Waverman, 2005; Deloitte, 2008; Ovum, 2006 and McKinsey, 2007). It is reported that an increase of 10 mobile phones per 100 people in a typical developing country, would boost GDP growth by 6% (Vodafone, 2005). Generation of employment is another economic element considered (Ovum: 2006 and Deloitte:
2008).
In Tanzania efforts to eradicate poverty advocated by ICT Policy, Vision 2025 and MKUKUTA using ICT and specifically the Mobile phones, can in many ways to do that by:
Facilitating the convergence of local and global knowledge and disseminate it to the rural areas so as to improve economic production capacity in the settings in which many of the poor live;
Supporting the documentation of the hybrid knowledge developed from the convergence into explicit knowledge components, which are easy to transmit and store;
Enabling the modernization of agriculture practices so as to improve yields, processing, marketing, sales and storage of the produce harvests;
Facilitating fast, reliable, and affordable means of communication and information exchange;
Providing new investment and revenue streams through establishment of the telecentres and other digital ventures.
Lastly there are other benefits from mobile phone technology that are not tangible. These normally are difficult to measure in terms of value. They may not have direct economic benefit, but they certainly enhance and promote the growth of culture, society and societal ties. One of these benefits is the social capital or social cohesion.

EXECUTIVE SUMMARY
TIGO COMPANY
Tigo is the first cellular network in Tanzania, it started operations in 1994 and is Tanzania’s most affordable and innovative mobile phone operator.
Tigo is part of Millicom International Cellular S.A (MIC) and provides affordable, widely accessible and readily available prepaid cellular telephony services to more than 30 million customers in 13 emerging markets in Africa and Latin America.
The success of Tigo is based on the “Triple A” strategy which stands for Affordability, Accessibility and Availability. It create a world where mobile services are affordable, accessible and available everywhere and to all. This guarantees that their subscribers experience the best services at the most affordable rates throughout our 26 regions in both Tanzania Mainland and Zanzibar.
MISSION
Tigo is the most innovative and first cellular network in Tanzania. Organization Goal

Organization goals explain how an organization intends to go about achieving its mission. One of the Tigo goals is to increase market share and making profit. Also goals of introducing new services in each month and providing its services across whole Tanzania have become great goals in supporting its mission. Organization Services
Tigo as one of wireless telecommunications provider in Tanzania offers the following services in Telecommunication industry in the following category.
Postpaid and prepaid voice, SMS, long distance calling and roaming.
High-speed mobile internet on mobile or computer.
Mobile financial services with ‘TigoPesa’. Money can be sent and received through a mobile phone either to friends and family or to make payments for services and utilities.
Instant entertainment on a mobile phone is available such as music, news and much more
Innovative products and services such as ‘Tigo Lends You Balance’ helping customers stay in touch even when out of credit

Porter 's Five Forces Model On Telecommunication Industry

1. Barriers to Entry - It 's true that the average person can 't come along and start a telecommunication company as it requires a large capital to start provision of services. For example just to erect one site requires 50million Tshs and this will only cater for 500 people. Also the key technology plus the many years of experience in the market make it very difficult for new companies to join in as the existing operators knows the market very well, has established loyalty with key buyers and suppliers and knows how to overcome market and operating problems. This creates a high entry barrier. For example a company called HITS tried with no success and operated for only one month
However, there is a low switching cost, as customers can easily switch from one network provider to another as the price changes or in response to the present ongoing promotions. For example when Zantel came into business it introduced very low prices with free promotions that captured a lot of customers but as soon as the promotions were over customers switched back to other operators.

2. Threat of Substitutes– There exist a number of substitute products when it comes to mobile phones network providers. Almost all the network provides the same products as the other and hence creates a stiff competition for customers.
However despite the presence of alternatives Tigocompany has managed to differentiate their products from the substitutes. For example, Extreme services that contains 15 minutes of on net calls, 50 MB and 100 SMS for only 450 Tshs, while other network providers, for almost the same price gives either 100 SMS or 10 minutes of on net calls.

3. Competitive Rivalry–Tigo faces a high competitive rivalry from other network providers as the industry is very competitive and hence high cost of competition. This is true because customers have very low switching costs.The industry is still growing statistics shows a growth from 3% to 15% in ten years. Also the industry have very high exit barriers as the investment capital is pretty high, the government policy and infrastructure invested making rivals to stay and compete rather than declaring defeat.

4. Bargaining Power of Suppliers–The bargaining power of suppliers is very high as there only a few of them and very organized, for example SPANCO these provides customer care services for all the three major mobile network providers and IBM provides IT services for all the three major mobile network providers. Also some suppliers cannot be substituted for example HELICOS is the only supplier that does services on sites for all network providers. The presence of unique products from suppliers like networking services from COMVIVA and NOKIA SIEMENS and switching cost from one supplier to another is very high giving these suppliers a high bargaining power.

5. Bargaining Power of Buyers -The bargaining power of phone companiesischallenged. Consumers have a high bargaining power and when slightly dissatisfied with a certain product or network provider they easily switch and hence tend to control/dictate the price as they are very price sensitive, for example commission rates or ongoing promotions. The dealers and distributors also have a high bargaining power as there are only a few of them, the big ones being MAX MALIPO and MAXCOM that tend to purchase in bulky and work with most of the network providers hence holds a high bargaining power and pose a threat when they integrate their forces.

CONCLUSION
Any company must seek to understand the nature of its competitive environment if it is to be successful in achieving its objectives and in establishing appropriate strategies. If a company fully understands the nature of the Porter’s five forces, and particularly appreciates which one is the most important, it will be in a stronger position to defend itself against any threats and to influence the forces with its strategy. The situation is fluid, and the nature and relative power of the forces will change. Consequently, the need to monitor and stay aware is continuous.

Some issues during the implementation of these Five Forces are crucially important for organizations to build long-term business strategy and sustaining competitive advantages rather than simply list the forces. Successful use of the Porter Model Analysis includes identifying the sources of competition, the strength and likelihood of that competition existing, and strategic recommendations for the action a company should take in order to develop barriers to competition.

References
1. Michael Porter, Nicholas Argyres, Anita M. McGahan, "An Interview with Michael Porter", The Academy of Management Executive16:2:44 at JSTOR
2. Michael Simkovic, Competition and Crisis in Mortgage Securitization
3. Kevin P. Coyne and SomuSubramaniam, "Bringing discipline to strategy", The McKinsey Quarterly, 1996, Number 4, pp. 14-25
4. Michael E. Porter. "The Five Competitive Forces that Shape Strategy", Harvard Business Review, January 2008, p.86-104. PDF